It is not unusual if you find yourself short of the cash you need to make a big purchase or alleviate the financial challenges you might be going through. Many other people are experiencing the same difficulties. According to a report by the Bank of England, the number of people taking out various types of personal loans in the UK has been increasing steadily over the years.

For the purposes of definition:

A personal loan is a loan that is not secured against your property or another asset, and is granted based on your income as well as your credit history. It is repaid in monthly instalments over a specified period.

People apply for personal loans for all kinds of reasons. However, if you are considering getting a loan, it is crucial to know whether the reason you are taking a personal loan is justified…

What can you use a personal loan for?

First up, there are no restrictions on the purpose of taking a personal loan. You can use it to buy anything. However, you should take it only if you have no other options and only when you know you will be able to repay it.

The top uses for a personal loan in the UK today include:

Home improvement

Remodelling your house can be expensive. Luckily, with the right personal loan, you can have your house looking as good as new. You can use it to finance improvements such as remodelling your kitchen, bathroom, building an extension or making repairs.

Improving your home has many benefits including increasing the resale value (if you intend to sell), personal enjoyment, as well as minimising expensive repairs that might be needed later.

Debt consolidation

If you are wondering whether your purpose for taking out the loan can affect your application, the answer is yes it can.

You might encounter problems with some lenders if your intention is to consolidate other debts, because you already appear to be high risk. However, it is one of the most popular reasons people take out a personal loan. If you have many outstanding loans all with different interest rates and balances, you might want to combine all those into one monthly instalment. This could reduce the overall interest rate, as well as making the repayments easier to manage, as you will only have a single payment leaving your account.

Making a big purchase

You might have to save for months, sometimes even years, to be able to buy a car, go on your dream holiday, or pay for your wedding. Personal loans help you get things done quicker and save money that would be spent on other short term solutions for example, paying for train fares.

Unexpected expenses such as a broken appliance

Often important household appliances such as a washing machine or cooker can break at the most inconvenient of times. They are essential to your daily lifestyle but your emergency funds might not be enough to cover all the costs involved in replacing or repairing them, and you will have to look for other ways to do it. Applying for a personal loan will help you finance any unplanned expenses.

When should you not apply for a personal loan?

Even though there are no restrictions on taking out personal loans, there are some instances that you shouldn’t apply for it. For example:

If you are financially unstable

Are you expecting some negative changes to your income or employment soon? If yes, then this might be a bad time to be considering taking out a loan. If the reason for looking for a loan is not time-critical, then you might opt to open a savings account and/or start minimising your expenses to gradually accrue the required money.

If you will not profit

It may sound obvious – but please don’t take a loan just for the sake of it. You will end up paying back the money spent on a bad investment. Have a clear plan and purpose before applying for the loan.

If you can save enough money

Is your purpose for taking out the personal loan urgent? If you want to spend the money on your dream holiday, which you know you could afford if you saved the money, then don’t apply. You can book the trip early and pay in monthly instalments or open a holiday savings account to help finance it.

What you should consider when taking out a personal loan?

Many institutions are offering personal loans in the UK. You should select the one that helps you achieve your financial goals. Consider these factors to help you choose the best lender.

Amount – Different lenders have different minimum and maximum amounts that one can borrow.

Interest rates – It is among the first things to check. Only take out a loan that you are completely sure you will be able to afford to repay. As much as possible, try to avoid being in debt. Choose a lender whose interest rates are lower and has short term repayment.

Fees – Some loans come with no fees while others have them. The fees add to the principal and increase the loan amount and repayment.

Loan terms – Check the duration of repayment. Loans with shorter repayment periods have less interest compared to long term ones.

Annual Percentage Rate (APR) – The best loans have the lowest APR because they are the least expensive.

The flexibility of repayment – Check if you are allowed to pay more than the required monthly instalment amount or if you can repay the entire amount early without being penalised.

Final words

Personal loans can be a lifesaver, especially when you need money urgently. However, you should be careful when applying. You must always be aware that they have to be repaid in the end, with interest. Evaluate the reasons why you want to take out a personal loan to decide whether you have to borrow or not. If you have to apply for a personal loan, ensure you choose the best lender.